Trading in the stock market can sometimes be complicated. It can also be confusing. It can be challenging to know what trade to make and when to make it. However, there are those trading opportunities that are clear and obvious. Usually, the “keep it simple stupid” trades tend to be the best. Although “simple” doesn’t mean that the trade will work out in your favor, at least you knew it was the right trade at that time. A stock that might have made a move that fits that description would be that of PHH Corporation.
PHH Corporation is an outsource provider of mortgage and fleet management services. PHH operates in three segments: Mortgage Production, Mortgage Servicing and Fleet Management Services. It provides mortgage-banking services to a range of clients, including financial institutions and real estate brokers, throughout the United States. PHH’s mortgage banking activities include originating, purchasing, selling and servicing mortgage loans through its wholly owned subsidiary, PHH Mortgage Corporation and its subsidiaries. It provides commercial fleet management services to corporate clients and government agencies throughout the United States and Canada through its wholly owned subsidiary, PHH Vehicle Management Services Group, LLC.
Please take a look at the 1-year chart of PHH (PHH Corporation) below with my added notations:
PHH has been holding a very important level of support at $14 (navy) for the last (5) months. No matter what the market has or has not done this year, PHH has not broken below $14 . . . until last week. Something seems to have changed with PHH. It has always held $14, and then the level broke. It’s simple. Stocks that break significant resistance usually move higher and stocks that break significant support tend to move lower.
The Tale of the Tape: PHH had a very important support at $14 throughout the last several months. Last week the stock broke below that $14 level, thus should be moving lower. The most ideal entry to limit risk would be a short position on a rally back up to $14, if that happens, with a stop placed above that level. A break above $14 would negate the forecast for a move lower and a long position could be considered.
Before making any trading decision, decide which side of the trade you believe gives you the highest probability of success. Do you prefer the short side of the market, long side, or do you want to be in the market at all? If you haven’t thought about it, review the overall indices themselves. For example, take a look at the S&P 500. Is it trending higher or lower? Has it recently broken through a key resistance or support level? Making these decisions ahead of time will help you decide which side of the trade you believe gives you the best opportunities.
No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade. Capital preservation is always key!
Christian Tharp, CMT